Second Image - New York City Seal.. January 28, 2010 - The U.S. Supreme Court on Monday, January 25th dismissed New York City's racketeering claim against a New Mexico company that sells "tax-free" cigarettes online to New Yorkers. The city's lost taxes "were not caused directly by the alleged fraud," Chief Justice John Roberts wrote, according to a report from Courthouse News Service.

Hemi Group set up a website—buydiscountcigarettes.com —to sell cigarettes from low-tax or tax-free regions to people in high-tax areas, including New York City. Hemi Group, Jemez Pueblo, N.M., has no duty to charge, collect or remit the city's tax. But federal law, specifically the Jenkins Act, requires out-of-state vendors to file reports with state tobacco tax administrators identifying the names and addresses of in-state customers.

New York City filed a lawsuit under the Racketeer Influenced and Corrupt Organizations Act (RICO), claiming Hemi Group's business constitutes mail and wire fraud, causing the city to lose tens of millions of dollars in potential cigarette taxes.The district court dismissed the case, but the 2nd Circuit revived the RICO claim, ruling that the city's alleged injury—lost tax revenue—was "business or property" under RICO, and came about "by reason of" the purported fraud.

But Chief Justice Roberts ruled that the city "cannot satisfy the causation requirement" that any injury was caused by the alleged frauds. "Here, the conduct directly responsible for the city's harm was the customers' failure to pay their taxes," Roberts wrote. "And the conduct constituting the alleged fraud was Hemi's failure to file Jenkins Act reports. Thus ... the conduct directly causing the harm was distinct from the conduct giving rise to the harm."

In a dissenting opinion, Justice Stephen Breyer said Hemi Group's failure to provide the Jenkins Act information "proximately caused New York City to lose tobacco revenue." He added that the city's revenue loss "falls squarely within the bounds of the kinds of harm that the Jenkins Act seeks to prevent. The statute is titled 'An act to assist states in collecting sales and use taxes on cigarettes," Breyer noted.